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Israeli Reformers Must
Break Up the Banks

By

Robert L. Pollock

Updated Feb. 4, 1997 12:01 a.m. ET

JERUSALEM--"I've put forward two main goals in six months: the first is to bring Israel back to a sound economic course and we've done that; the second is to have the peace process be brought back on a sound course and we've done that as well," Prime Minister Benjamin Netanyahu told me inside his Knesset office recently as the Israeli legislative body was debating the Hebron deal. Six months, of course, seems a bit too short for his economic reforms to be implemented and have any measurable effect.

Still, this prime minister was able to push through some tough budget cuts, and he seems determined not to use the demands of Israel's security needs as an excuse for inattention to the economy. In fact, he took offense when I asked if he would have time to focus on the economy now that the Hebron deal was signed: "I found time even when I had no time."

Across the hall I found a similarly determined Natan Sharansky, trade and industry minister. "The last decisions of the government are really very important. We are [getting rid of] the monopoly on public transportation which was 70 years old, with the monopoly on selling export agriculture, with the monopoly on telephone communications. Step by step we are going to make private markets work," he says. His reference to transportation refers to the end of the monopoly held by the Dan and Egged bus companies.

Special Interests

Still, he harbors no illusions that the process is going to be easy. First there are the special interests--big business and the powerful Histadrut labor organization--who have benefited from all the privileges long granted by the Israeli government. "Our industrialists are every day calling and threatening and pressing me because it's too much competition for them, but I believe that it's very good and we really have to decentralize our economy," says Mr. Sharansky. Then there is the bureaucracy.

Like most Western "democracies," Israel is really half regulatory state. As the last government's experience with a proposed free processing zone shows, even the near unanimous resolve of the Knesset isn't enough to prevent the "civil servants" from thwarting reform. "They [bureaucrats] are opposed all the time. It's not easy. But for the first time we have a prime minister, minister of finance [Dan Meridor], and myself who have the same approach. Usually it was different. Usually the minister of trade and industry was like a lobby of local industrialists."

Early signs are indeed encouraging. The government is pushing ahead with plans to liberate the transportation, water, telecommunications and construction sectors, as well as privatize the management of public housing. But that's the easy part. The real test of how serious this government is about making Israel a competitive market economy will be the breakup and privatization of the oligopoly banks. Nominally government owned, but run with little regard for the public interest, three banks--Hapoalim, Leumi and Discount--dominate the Israeli economy in a manner unparalleled in the developed world.

L ike most Western 'democracies,' Israel is really half regulatory state. As the last government's experience with a proposed free processing zone shows, even the near unanimous resolve of the Knesset isn't enough to prevent the 'civil servants' from thwarting reform.

According to Daniel Doron, the director of Israel Center for Social and Economic Progress and a member of the independent economic advisory committee that presented Mr. Netanyahu with a report on the banks last week, these three giants control about 80% of Israeli bank assets. The largest, Hapoalim, alone controls 40%, and manages most of the country's pension and provident funds. By comparison, Deutsche Bank controls only about 5% of German bank assets.

And just as bank dominance (although comparatively small) has hurt the German stock markets--turnover on the Frankfurt exchange is half the volume in London, while the German economy is twice the size of the U.K.'s--it has crippled the Tel Aviv stock exchange, says Mr. Doron. The turnover of Israeli shares listed on the Nasdaq Stock Market in Washington is three to four times the total turnover in Tel Aviv. Together, Israel's big three control more than half of mutual fund assets and dominate the stock markets through their role as brokers.

Even worse, the banks, particularly Hapoalim, dominate the Israeli economy more directly through large shareholdings in Israel's monopolized and oligopolized industries. Hapoalim owns large shares in Israel's two largest conglomerates, Clal and Koor, controlling hundreds of companies involved in all sectors of the economy. It is often complained that would-be competitors are easily crowded out and denied access to credit.

You'd think the breakup of such economic power would be priority number one for a government intent on free market reform. But I found Messrs. Netanyahu and Sharansky both somewhat reluctant to talk about the issue. Perhaps their caution is understandable, given the array of special interests opposed to liberalization. But some observers are interpreting the government's silence as a sign of defeat. "The fact that they're not talking about the banks is a red light, and an indication that they're not serious," Steve Plaut of Haifa University recently told AP-Dow Jones News Service.

To say they're not talking about the banks is an exaggeration. Shares of Hapoalim, Leumi and Discount are all scheduled for sale. But the risk is that the privatization will be illusory--that they will simply buy each other--and that they will be privatized but remain in their current form. If that happens, the invocation of property rights will likely prove an obstacle to any further reform. That danger suggests that the government should act while it is still in control.

According to Mr. Doron the consensus in the advisory committee is that the reform should proceed in two phases. First, the banks should be separated from the pension, provident and mutual funds. There is a pending law that would push the banks in this direction, but their lobbying efforts succeeded in whittling it down. Second, the banks must be forced to sell much of their holdings, particularly in the large conglomerates. Again, the government is already pushing them in this direction, but the committee urges more effort.

Time to Lead

Insiders say that Mr. Netanyahu is in favor of such efforts but is concerned that reform could become stalled for years in the courts. Nevertheless, it seems like a perfect opportunity for leadership. If Ronald Reagan and Margaret Thatcher could win broad support for taming the power of the trade unions, surely Mr. Netanyahu should be able to win support for taming the power of big business.

Some may argue, of course, that the prime minister has more important things to worry about. But they miss the critical connection between Israel's economic and security needs. So long as the country remains dependent on foreign aid and economically isolated from its neighbors, the peace process has little chance.

Give Israelis and Arabs a stake in economic growth (which slowed to 4.4% of GDP in 1996, according to official figures, from 7.1% in 1995), however, and there will be fewer reasons to fight. Number one in the world (per-capita) in terms of high-tech start-ups, Israel is already off to a good start. But it needs financial liberalization to make sure they grow. Mr. Netanyahu must resist the temptation to take the easy way out and sell the banks and their assets together. If that happens, the man who set out to liberalize the Israeli economy could become the man who made it impervious to real reform.

Mr. Pollock is an editorial page writer for The Wall Street Journal Europe.

Israeli Reformers Must
Break Up the Banks

JERUSALEM--&quot;I've put forward two main goals in six months: the first is to bring Israel back to a sound economic course and we've done that; the second is to have the peace process be brought back on a sound course and we've done that as well,&quot; Prime Minister Benjamin Netanyahu told me inside his Knesset office recently as the Israeli legislative body was debating the Hebron deal.